What Is a Unilateral Contract in Insurance?

An insurance policy is an agreement that protects individuals and entities from financial losses. These policies function as contracts. Unlike many typical agreements, insurance policies are generally considered unilateral contracts. This means only one party makes a legally enforceable promise. The other party accepts the offer by performing a specified action, rather than by making a counter-promise.

Characteristics of Unilateral Insurance Contracts

A unilateral contract is an agreement where an offer can only be accepted through performance, not by a reciprocal promise. In the context of insurance, the insurer makes a promise to pay a claim if a covered event occurs as outlined in the policy terms. This commitment by the insurer is a core element of the unilateral nature of the contract.

The policyholder accepts this promise by performing an action, primarily by paying the premium. The policyholder does not make a promise to continue paying premiums or to maintain the policy for a specific duration. This means the policyholder is not legally obligated to continue the contract; their acceptance is demonstrated through their actions, which activate the insurer’s obligation.

The insurer’s obligation to pay a claim is conditional upon the policyholder fulfilling certain requirements. These conditions typically include the timely payment of premiums and the proper filing of claims. If these conditions are met, the insurer is bound to its promise. This conditional aspect is a defining feature, as the insurer’s duty to perform arises only after the policyholder’s actions trigger it.

Policyholder Responsibilities and Insurer Obligations

The unilateral nature of an insurance contract grants the policyholder a distinct choice regarding the continuation of coverage. Policyholders have the option to continue paying premiums to keep their coverage active. If a policyholder chooses to stop paying premiums, the coverage will lapse, but they are not considered to be in breach of contract. This is because they never made a promise to the insurer to continue payments.

Conversely, once a policyholder has paid the premium and the policy is active, the insurer is legally bound to fulfill its promise. The insurer must pay covered claims as long as the policy conditions are met. An insurer cannot unilaterally cancel a policy without cause, nor can they refuse to pay a valid claim. This binding obligation on the insurer ensures that policyholders receive the protection they paid for.

The policyholder does not make a promise to the insurer in exchange for the insurer’s promise. Instead, their action of paying the premium triggers the insurer’s obligation to provide coverage. This structure creates a framework where the policyholder controls the activation and continuation of the insurer’s promise through their performance.